WEST LAFAYETTE, Ind. — This year farmers have more alternatives to consider with respect to cost recovery or depreciation on assets that they placed in service during 2008.
“Congress wanted to stimulate the economy, so they made two changes that apply to 2008,” said Purdue University tax law specialist George Patrick. “Both of these essentially give you more of your purchase price back in the year that it was placed in service.”
First, they added a 50 percent additional first-year depreciation, which allows a farmer to deduct 50 percent of the costs of new qualifying personal tangible property against 2008 income, he said.
Qualifying property includes equipment and machinery, breeding or dairy livestock, general-purpose farm buildings and machine sheds/shops.
For example, if a farmer trades in a sprayer for a new sprayer, both the tax basis of the old sprayer that was traded in, as well as the additional cash that’s paid qualify for the 50 percent additional first-year depreciation.
All or nothing
One of the limitations is it’s an all or nothing situation. If a farmer bought a new planter and a new sprayer, both in the 7-year property class, that person has to take the 50 percent additional first-year depreciation on both of them or neither of them.
Congress also increased the Section 179 expensing limit from $125,000 to $250,000 for 2008, Patrick said. Section 179 expensing can apply to both new or used tangible personal property in the 15-year property class or less, which includes dairy and breeding livestock, machinery and equipment, land improvements such as tile drainage, and single purpose farm buildings.
According to Patrick, Section 179 expensing provides farmers more flexibility, unlike the all-or-nothing 50 percent additional first-year depreciation.
The amount elected could range from $1 to what ever the cost of the asset was, as long as the total is not more than $250,000.
He warned, however, that it’s important to be aware that not all tangible personal property is eligible for Section 179 expenses, such as general purpose buildings.
Single purpose buildings are eligible. Single purpose buildings include a hog barn, dairy barn, or milking parlor — buildings that have one intended purpose and can’t be used for something else.
If neither of these tools will suit, it may be worth looking at farm income averaging, Patrick said.
Farm income averaging is a tool, which essentially takes the unused tax brackets from the previous three years (2005, 2006 and 2007) and taxes part or all of the farm income for 2008 based on the prior three years’ rates.
Patrick said this tool may work for some farmers and not for others, but has the potential to save a person quite a bit in taxes.
Where are you at?
Before they can determine which of these strategies to use, farmers should look at what their receipts and expenses are and where they are in terms of taxable income and make the necessary adjustments, Patrick said.
Expenses include things like depreciation and interest — things that are deductible for tax purposes.
“It’s important to have some kind of income level you’re trying to hit annually, rather than swinging up and down dramatically each year,” Patrick said.
“This has been such a crazy year and farmers may not be in the position they expected to be in, but there’s still time between now and Dec. 31 to make changes.”
Higher, or lower?
If income is lower than expected, look at selling commodities and postponing additional purchases until next year, Patrick explained. If income is higher than expected, consider prepaying expenses and putting off additional sales or at least arrange it as a deferred payment, until 2009.
Get some help
After making necessary changes between now and the end of the year, producers then can work with a tax professional to determine which strategies will work best, he said.
When working with a tax professional, it’s important to be organized, because they bill on an hourly basis and you need to use them as effectively as possible, Patrick said. It’s also important to work with a tax professional for more than one year. This will give the tax person a chance to better understand the business and the producer a chance to learn what the tax professional needs and wants, he said.
You can’t avoid taxes
Patrick cautions farmers not to get so wrapped up in trying to reduce the amount of tax they owe, but to focus on the basic economics of it.
He also noted that the highest marginal income the tax rate is 35 percent, which means farmers will pay at least 65 percent of the cost of a tax-deductible expense.